Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House. Our podcast from Intercontinental Exchange on Markets leadership and vision and global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now welcome Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
When you think about the most notable corporate mergers and acquisitions, your mind may go to one of the thousands of different deals that we've seen over the last couple decades. Possibly you are drawn to Amazon's $13.7 billion purchase of Whole Foods back in 2017. Maybe it goes back to the more recent acquisitions like WWE's $21 billion merger with Endeavor Group in UFC. When TKO made its debut here a couple of weeks ago at the New York Stock Exchange, it was great to see our podium packed with Ari Emanuel, Dana White, Vince McMahon, Triple H, and the former dual UFC champion, Daniel Cormier. Where did I get the bug to watch big deals happen? You'd have to go back 23 years to the moment that Steve Case, the founder of America Online, gobbled up Time Warner shaking hands with then CEO, Jerry Levin, in a deal worth $182 billion. And on that day, the tail had truly wagged the dog.
Whatever merger's on your mind, it's possible that our guest today helped broker it. Rob Kindler has a long history in the M&A space. For five years he worked for JPMorgan Chase, that's NYC ticker symbol JPM, as its Global Head of M&A. Followed that up with 17 years at Morgan Stanley, ticker symbol MS, as Vice Chairman and Global Head of M&A. Now he's the Global Chair of M&A and a partner with one of the firms that really led the particular genre of law, Paul Weiss. Rob's advised on such deals as Comcast's $72 billion acquisition of AT&T Broadband, Bristol Myers Squibb's $74 billion acquisition of Celgene and Dreamworks' $4 billion spinoff of Dreamworks Animation, among so many other deals in his repertoire.
On today's episode, Rob's going to take us through his history in the boardroom, those late night document drafting sessions and reflect on some of the blockbuster deals he's had a hand in. We're going to dive deep into the external factors impacting the market, while understanding what its future could look like. Are we looking at 2024 as another slow and sluggish year in M&A or is the market due for a major bounce back in the months ahead? Our conversation with Rob Kindler is coming up right after this.
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Josh King:
Welcome back Inside the ICE House. This is Josh King. Remember to subscribe wherever you listen and rate us and review us on Apple Podcasts so people know where to find the show. Our guest today, as we were talking about in the introduction, Rob Kindler spent 17 years at Morgan Stanley as Vice Chairman and Global Head of M&A. He's now a partner at the law firm, Paul Weiss, the Global Chair of Mergers and Acquisitions for the firm. Welcome, Rob, Inside the Ice House.
Robert Kindler:
Thanks very much, Josh. It's great to be here.
Josh King:
You and I were talking a little bit before we got going about your prior expertise in podcasts. Curious, before we get to that, what originally drew you to the law in the first place?
Robert Kindler:
Like a lot of people in college, I really didn't have a particular direction. I actually majored in music and English, the romantic poetry actually, and I just think a lot of people go into law school when they don't really know what they want to do. Back then when I graduated from college, actually most people wanted to go into medicine. It was being pre-med and going to medical school was kind of the thing to do, but if you weren't science oriented, a lot of people went into law. So, I didn't have any lawyers in the family.
Josh King:
What were mom and dad?
Robert Kindler:
My dad actually was a plumber in Queens. He went into his own father's plumbing business, which was S. Kindler Plumbing. In 1926 is when it started. My mom was a receptionist and later on she became an antiques dealer.
Josh King:
And so, they looked at their kids and said, "One of you, maybe both of you, will become doctors." But you disappointed the family, the Kindlers?
Robert Kindler:
I don't think they really had particular goals for us. My sister, we were all musically inclined, but my sister ended up being a special ed teacher in Queens. My brother ended up being a comedian. He lives out in LA, but he was on a lot of shows like Everybody Loves Raymond and he was actually on David Letterman 43 times over the years. So, I don't think they directed us in any particular way. I was the only one that went to private school. My sister went to Queens College, my brother went to SUNY Binghamton, so it was just one of those things. I got into Colgate because I was a musician and I went to law school because I couldn't think of anything else to do.
Josh King:
So, these paths diverged. I'm fascinated in the Kindler household. One goes to Colgate and eventually finds his way into the law. The other heads out to LA where they make a show called LA Law, but he's doing comedy. When you guys get together, are you the straight man and he's the cutup? What are Thanksgivings like?
Robert Kindler:
I think it's pretty much both of us are the cutups. I'm probably more of a straight man. He actually went out to California to be a rock musician. He was a singer and songwriter and guitar player, also know classical violin, and then he just fell into comedy. Now, I did the banking for 23 years and law for quite a long time, but I think if this doesn't work out, I may go back into comedy.
Josh King:
Well, you've got a long run at Paul Weiss before you get to that point. But after about two decades at Morgan Stanley, you decided to join Paul Weiss, sort of a different uniform in the same game. What's been the biggest difference for you and your role in these first couple months of the firm compared to being inside the bank itself?
Robert Kindler:
Well, the actual role of advising as a senior person on M&A deals is fairly similar, but the law firms have changed dramatically in the 23 years since I was a lawyer before, because I was a lawyer for 20 years before becoming a banker. These law firms have become much bigger. But what's also changed is that when I became a banker 23 years ago, it was usually the bankers that got the first call on deals. Be one of these things where the companies would turn to the bankers and see if a deal works or what the financial aspects were, and then if they figured all of that out, then they go over to the lawyers and say, "Oh, why don't you do the papers for it."
Now, it's pretty much the opposite, and that's for a couple of reasons. One is that companies have very large inside corporate development staffs, many of them former bankers. They don't need the bankers to source deals or figure out the strategic logic of deals. They definitely need bankers. Bankers are important part of the M&A process in figuring out how to finance deals and figuring out how the market will receive deals, but they don't need the sourcing of deals and that kind of expertise.
The other aspect is that regulatory become such a big part of the M&A process that companies really want to understand from the lawyers what the issues are and see whether a deal is really even possible before going and engaging a banker. So, we really are the first call now. If a company's thinking about doing a transformative deal, not a small add-on deal, but a transformative deal, they want to know what the regulatory implications are and not just in the US, but globally. And that's again why these law firms, like Paul Weiss, have become global law firms.
Josh King:
Right. And the regulatory environment changes every couple of years, especially when a presidential administration changes over. So, certainly here at Intercontinental Exchange ICE, we've become very familiar with the approach that Lena Kahn has taken at the FTC, as we worked over the last 18 months or so to get our $11 billion acquisition of Black Knight through and did it through sort of a novel series of divestitures that weren't easy or happy to do, but that's what it took to get that deal done, Rob. What does make for the right kind of regulatory training for an M&A lawyer in a way that they never had to maybe know about who's sitting in the seat of the FTC before?
Robert Kindler:
Well, there have always been political aspects to regulatory approval. That's not really new. I remember when I advised Continental Airlines in merging with United Airlines and what Continental decided to do was to rename the airline, United, and move the offices, the headquarters, to Chicago. And the reason for that was obvious. We had a president from Chicago and doing those kinds of things saying, "Hey, look, it's still going to be called United. The headquarters are going to be in Chicago." That kind of smoothed the way and in fact, that deal got approved. I'm not sure that deal would get approved now, but it got approved then.
And then in every administration, I remember when AT&T went after Time Warner, I was one of the bankers for Time Warner, that was challenged by the FTC. There was no reason to challenge it. AT&T had no businesses like Time Warner's business, but they did own CNN and I think the Trump administration didn't like CNN, so they attacked the merger. On the other hand, Disney went and acquired Fox. Well, that had the advantage that they own Fox. And so, that got waved right through and that was the number one box office studio, the number three box office studio. So it was basically, let me see about this, AT&T is going after Time Warner where there were no regulatory issues, but they own CNN, let's attack that. And Disney's going after Fox, whereas the number one and number three studio. But guess what? We kind of like Fox, so let's not go after that.
So, politics has always been part of the process, but nothing like now. Nothing like now. Right now you can be sure that anything you're going to do in the US is going to get very, very, very close scrutiny and the issue with it isn't just that it takes close scrutiny, is the timeframe. And the concept, as you pointed out your deal, the idea that you are a selling company and you are facing 18 months to two years of an approval process, even if you have comfort that it's going to get done, that is a very risky thing to do from the sell side.
Josh King:
You mentioned that Continental United deal from way back. Gordon Bethune, one of the great deal makers in American aviation and just looking at 2023 is a whole, why do you think there's more caution and less activity over the last couple months and some deals that have been long simmering that have not been able to get done?
Robert Kindler:
Well, there's a lot of things going on. The first I would give is not just regulatory, which is high up there, but market volatility. Historically when there's a lot of volatility in the market, deals don't get done because no one really knows what the right price is. And you combine volatility in the market with a perception among a lot of people that the market's actually overvalued. It just causes people to pause and see whether there'll be a correction, particularly if you're on the buy side.
Also, if you look historically, the volume of M&A, M&A volume, has actually fairly closely tracked increases in market cap. So, if you look at markets historically, if you had a 10% or 15% up year in the global stock markets, you would have a 10% or 15% up year in M&A. Now obviously we have a down year in M&A, so between volatility and the market being down and then you put on top of that regulatory, but the regulatory has other implications on timing. If you are a company thinking about either being sold or buying and there's any regulatory issue, you are going to wait to see if there's a change of administration a year from now. There may not be, but there's certainly... You want to wait for that. You don't want to do a deal in the face of the kind of scrutiny you're going to get now.
And then finally, interest rate environment is not particularly helpful for M&A. It doesn't hurt as much as people think, because even in the private equity side, what drives returns is the multiple of cashflow you can get. It's not that driven by interest rates. Obviously, if your interest rate is 8% rather than 6%, your returns are somewhat lower, but if you can only lever it four times rather than six times, your returns are way lower. It's not just the amount that interest rates have gone up, it's really that the leveraged finance LBO market is very, very difficult now. So you combine all those things, and I am not optimistic that 2024 is going to see much of an upturn.
Josh King:
A bunch of reasons why 2024 might not see much of an upturn. We have had for the last year and a half a war between Russia and Ukraine. Now over the last month, a war between Hamas and Israel, we've had two notable deals in the oil sector done in the last month. But how big of an impact do you think overseas foreign volatility have on the M&A market?
Robert Kindler:
I would say that the effect is really because this kind of turmoil and awful tragedies and turmoil creates a lot of volatility. You're seeing 400 or 500 point swings in the equity markets. It's very hard to do deals when you have those kinds of swings. And if you look back historically in periods of volatility, people just do way, way fewer deals. So, I think it's that. I think it's really, it's a confluence of so many things. These awful wars have created uncertainty which creates volatility. The regulatory environment has become harder and harder. And then you take the flip side of that, which is that M&A really is important to companies.
I mentioned before that when I became a banker 23 years ago, corporations didn't have big corporate development and M&A groups inside of the companies. They didn't. Now they do. Because companies realize that what investors want is growth and getting a combination of inorganic growth by investing in the business and M&A is very important. There's been studies done recently that companies that have engaged in M&A consistently done, not huge deals, but have consistently done M&A, do perform much better than companies that have stayed away from M&A. It's ironic. It's very ironic, but at a time when M&A is very important, it's become more difficult. But what that leads to are lots of smaller deals, lots of deals in the $100 million to $1 or $2 billion, and we're going to see a lot of those deals.
Josh King:
If I could throw at you, Rob, a couple other factors just that I see as what makes 2023 a little different than other years. One is labor unrest. We've had the writers and actors strike, doesn't probably affect entertainment or Hollywood mergers that much. It's going to get resolved. Also in Detroit, the UAW strike, Kaiser Permanente had a workers strike. In what ways do you think labor unrest affects the willingness to get a deal done?
Robert Kindler:
When you have a non-union company buying a company that's unionized, that's always created complexities. It's probably even more complexities now. But deals, there are very few deals that rise and fall based upon union. Of course, we have what's been going on at US Steel where the unions have weighed in on that. I don't really think it's that significant. The union issues are just, if you look at... My father, as I said, was a plumber and was very much in favor of unions, and I certainly get it, but fewer and fewer shops or union shops now in the country. So, I don't think it's a big factor.
Josh King:
With the differences between domestic and foreign M&A markets. There's increasing complexity when it comes to doing deals across borders. How do those challenges impact the size and structure of these types of acquisitions?
Robert Kindler:
It's been difficult. We did a deal a few years ago for a company that had a very small operation in Russia, and this is way before, this is like five or six years ago, and it took a year to get the approvals in Russia. So, the global regulatory environment has been challenging for quite a while. Europe has been much more challenging than the US. If you're doing a multinational deal, you really need to have lobbyists on the ground, you need to have the right regulatory lawyers on the ground, because it is a big challenge. And yet, another reason why deals are just taking longer, large deals rather than small deals: there's always been politics too, even when there are no regulatory issues.
So, I'll just give you a couple examples. A long, long time ago, there was an offer for Unocal made by CNOOC, which is a Chinese company, and so they made an offer for Unocal. Chevron came in and bought Unocal, and then CNOOC came in with a topping bid and it was totally slammed. There were hearings in Congress, "How can you let a Chinese company take over Unocal, which is an American icon?" Well, missing from that story is that 100% of the assets of Unocal were in Indonesia. It had nothing to do with the US. So, these challenges have been around for a while. When Shuanghui bought Smithfield Foods, the big pork producer, there were hearings on Congress about, "How could you let the Chinese buy this big pork producer because you make Heparin from pork." A blood thinner. So, how could you let the Chinese dominate that market by buying Smithfield? Again, missing from that conversation was that the Chinese already made 100% of the Heparin even before that.
So, political considerations have always been there, but they've actually become even more so now. Everything to do with CFIUS, every deal, if you want to buy a company that makes donuts and you're a foreigner, they're going to see if your donut warehouse is within X miles of a military base. Nothing escapes that kind of scrutiny. And whether it's a good thing or not, don't know, but I do know that it's holding up a M&A considerably.
Josh King:
Maybe the big joining together of large companies is being held up, perhaps the splitting up of companies and creating two from one, the creative destruction as Joseph Schumpeter used to talk about, is increasing in pace. Recently, at the New York Stock Exchange, Rob, NCR, the old National Cash Register, split into NCR Atleos, which is now under the ticker symbol NATL, and also NCR VOYIX, under the ticker symbol VYX. Tim Oliver, the CEO and president of the new NCR Atleos, joined Trinity Chavez on our NYSE TV show. Let's hear him talk a little bit about the decision to do that.
Trinity Chavez:
Why this spend, why now?
Tim Oliver:
The stock market couldn't figure us out. Our customers were happy with us, our employees were happy with us, but our valuations still stayed too low. And I think it's that conglomerate discount or just the amount of work it took to cover companies, it's very complicated, had too many pieces. I think this allowed people to find the piece of the company they most liked, hopefully like them both, but that they most like and invest in that one.
Josh King:
Do you think we're reaching a point where larger acquisitions might soon not necessarily be the thing that occupies most of our attention, but instead these more frequent splitting offs of different parts of companies?
Robert Kindler:
This has been happening, and obviously continuing to happening for years, but what's really notable is that conglomerates aren't being formed again. And there were all these conglomerates from Gulf and Western and Tyco and GE was obviously the best example of the conglomerate. Well, for lots of reasons, including activism, no more conglomerates are being formed. What shareholders want is corporate clarity. That is what they want. They say, "If I want to buy these disparate businesses, let me go out myself and buy a public company that's in that. Don't be an investor for me by owning all of these unrelated businesses." So, we're not seeing any new GEs or Gulf and Westerns or ITTs or Tycos. None of them are being formed. All of them really have been broken up.
Now, sometimes when companies are doing these spinoffs, it's tax driven, because a lot of these businesses have very low tax bases. So, if NCR had sold one of their businesses, it would've been a huge tax bill. On the other hand, if you spun it off and then later that business got bought, you would avoid having to pay any tax on it. So, some of this is driven by that, that you really, it's easier to do a spinoff than a sale from a tax point of view.
But the overall theme clearly is that investors want corporate clarity, and I think that's behind things like Kellogg doing that spinoff, or Johnson & Johnson doing that spinoff. The same, why does a pharmaceutical company have basically an over-the-counter consumer products company? Why does that make any sense for investors? If I'm an investor, if I want a consumer products company, I want to go out and buy a consumer products company. I don't want it embedded within Johnson & Johnson. So yeah, I think we're going to have a lot more of that
Josh King:
And we will not soon again see the likes of Charlie Bluhdorn or Jack Welch on the corporate environment, who were so colorful in our past, Rob. A little bit in the private equity world, some of the things that we've been talking about, the high cost of financing, higher rate environment, private equity activity also seems to be down. Do you think we're going to see private equity continue to sit on the sidelines in the months to come, or are there more avenues for its rebound in the M&A market?
Robert Kindler:
Well, I would never underestimate the ability of private equity firms to do deals in any market. And so what's happening are a couple of things. Because regulatory considerations are so prominent. If you are a private equity buyer, you're going to be favored over a strategic buyer. If the strategic buyer has any regulatory issues, you would much rather sell to a financial buyer than to a strategic buyer. An example of that is when Simon & Schuster tried to do a deal, it got blocked, and then they went out and sold to a private equity, because they didn't want to deal with any of the regulatory concerns. So, I think the regulatory environment favors private equity. But on the other hand, high valuations in the market make it difficult to do deals. Higher interest rates, plus not a lot of leverage available in the market, makes it harder to do deals. So, I do think it is somewhat challenging.
Private equity firms are also doing these continuation funds, which are actually very good for investors. They're good for the sponsors as well. But if they've held an asset for a while and they really don't feel it's necessarily time to either take it public or sell it, they basically put it into a new fund. And so, for the investors they have a liquidity event, but they also, if they want to roll over into the new fund and keep the investment, they could do it. So, these continuation funds are becoming much more prominent, and I think they're good for everyone. I think they're good for investors and they're good for the sponsors. But no question, we are dealing in a tough environment even for the private equity guys.
Josh King:
You mentioned CFIUS a little earlier as we were talking about some of the overseas deals. I want to dive a little bit with some specificity into what happened last year in August when President Biden signed the CHIPS Act into law. The legislation certainly bolstered the American semiconductor research development and production industries. Do you think the law is going to have an impact on the M&A in the tech sector?
Robert Kindler:
I don't think it's going to cause more deals to be done. It's tough to have any further consolidation than the tech sector. It's already a pretty consolidated industry just because it's so capital intensive. So, I think what the CHIPS Act has done is just encourage, and I think it was very important to do, but to encourage having foundries here rather than foundries abroad. But I don't think there's going to be consolidation, because the CHIPS players are already so big. I can't imagine any of them consolidated.
Josh King:
In one of the interviews that you did on CNBC a while back, Rob, you said, I'm going to quote you here, that, "Boards know there's a high likelihood that they'll have to face activism." We had Jeff Fabin on the show a couple of weeks ago, one of the famous activists. You just have to open any blog or newspaper today to see what Nelson Peltz is continuing to give Bob Iger new headaches at Disney. What role does the activists play in the M&A market? You hinted at it earlier, but basically does it really create a sense of handcuffs on some CEOs and also light a fire under the butts of others?
Robert Kindler:
Well, overall, I think activism has been actually good for corporations and the market, because... Overall good, there's obviously many circumstances where it hasn't been good. But what it's done, and it's been around, activists by the way, has been around for a long time. In the '80s I represented Cummins against two different activists. The differences that those activists were like Hanson PLC, who no one's ever heard of or anymore, or Asher Edelman, the difference is that now these are funds. These are large hedge funds who are not just focused on activism, but one of the prongs of what they do is focused on activism.
So, what does that mean? Most corporations, I spend a lot of my time with boards and companies saying, "Okay, are we vulnerable to an activist?" And that's a healthy exercise, because you look at your portfolio of companies, you say, "Okay, should we be spinning something off? Should we be selling something?" Those are the kinds of things that activists look at. So, I think it's a healthy process for companies to go through that exercise. Now, activists, of course, are not even close to always being right, because they push for things that have short-term effects and short-term increases in stock price, but long-term, very devastating effects.
So, for example, a lot of people bought back stock under pressure from activists, and that is not a good thing. There is a place for buybacks. If you genuinely have excess cash, while taking account what you need for M&A and what you need to grow your business organically, sure, if you have excess cash you don't need in the business. Sure. But the concept that happened over the years of borrowing to buy back stock made no sense. I think the market is finally, the investors are finally saying, "Hold on a second now. We don't want you to buy back stock. We'd rather you do M&A or you actually invest at CapEx to grow the business. If you buy back stock, by the way, what are we going to do with the money, right? We'd rather have you guys out there doing it."
So, for years we went through the activist investors, looking for people to leverage up and buyback stock and corporations who gave into that live to regret it. And I've always told companies there are much worse things than losing board seats in a proxy fight. The worst things are doing anything, including leveraging up the buyback stock, that's going to hurt your business in the long term.
Josh King:
Here at the New York Stock Exchange, Rob, we're always having our eyes out for the next deal announced in the pharmaceutical sector. Paul Weiss involved when Merck and Co, NYSE ticker symbol MRK, acquired Prometheus Biosciences earlier this year, I think the amount was $10.8 billion. How do you think this deal will impact the M&A market and the pharmaceutical sector, and what other activity do you see in that space?
Robert Kindler:
Yeah, well, that was again, the market, like that deal that closed earlier this year. And part of the issue is, with pharmaceutical companies, is that they're so large that they need to find things that is within their business but that don't have regulatory issues. And this is certainly a case for that. There's not going to be mergers of big pharmaceutical companies, because it's already fairly concentrated. But biotech companies, smaller biotech, smaller companies, biotech companies, there's a lot of activity. I think that's going to continue.
Josh King:
So, at the beginning of our conversation, you've cast a bit of a wary eye on what 2024 might have in store, Rob, but if you were to help our listeners become smarter and in any way optimistic for where the deals may come from in the next 12 to 24 months, what are you really keeping your eye on? What do you find interesting in the space these days?
Robert Kindler:
I think a lot of people are comparing M&A volumes to 2021, but that's not really a fair comparison. 2021 was just an outlier year. It's actually like 2000 during the tech bubble was an outlier year. So, the question is, "What is a normal year?" And I think 2022 may have been something of a normal year, and now we're down from that. So, the M&A is definitely down. I can't really hold out much hope that in 2024 we're going to see lots of large deals and big deal value. I do think we're going to see lots of deals in the $1 to $5 billion, including public companies, because difficult to be a public company. And so I think we're going to see a lot of deals in that range. But if people are looking for big transformative deals in media, or in semiconductors, or in telecom, it's just not going to happen, in my view.
Josh King:
Well, those $1 to $5 billion deals will certainly keep your lawyers at Paul Weiss busy, and you as well. And we are looking forward, sir, to having you come to the Listed Company Advisory Board here at the NYSE in a couple of weeks. But this was a great preview, Rob. Thanks so much for joining us Inside the ICE House.
Robert Kindler:
Thank you, Josh. Much appreciated.
Josh King:
That's our conversation for this week. Our guest was Robert Kindler, Global Chair of Mergers and Acquisitions at Paul Weiss. If you like what you heard, please rate us on iTunes and Apple Podcasts so other folks know where to find us. If you've got a comment or a question you'd like one of our experts to tackle on a future show, make sure to leave us a review. Email us at [email protected] or tweet at us at @icehousepodcast. Our show is produced by Lance Glenn with production assistance, editing and engineering from Ken Abel. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. We'll talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information, and do not sponsor, approve or endorse any of the content herein. All of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of length or clarity.
